Just to clarify a few points for you...
0810 Kubuntu/Ubuntu/etc is on the horizon (by definition, 08 means 2008, 10 means October), however this says nothing about LMCE, until it is accepted into the Kubuntu tree, it will always be a case of them (Ubuntu guys) releasing the new OS first and then the LMCE guys scrambling to generate a new LMCE that will build and run on it. But I understand that the ultimate aim is to combine is as a standard option so that LMCE will come out with the new versions of the OS at the same time....
LMCE is entirely capable of h264, the codec is not the issue. There are 2 main issues for BD/HDDVD - first decoding hi-def H264 (lower resolutions, etc are fine), theoretically it should be able to do it with enough CPU grunt, but as Rodercot and others have pointed out, this seems to be a problem, second is the more critical for BD/HDDVD particularly - encryption, specifically HDCP which is an encryption scheme that encrypts the content from the surface of the disk right through to the playback display/amp. So the devices in between need to be able to intercept and handle this to do all the wonderful media centre things. Currently this is difficult, and yes M$ has deliberately muddied the waters and used DRM to its own advantage making it difficult for other players to get into that market. Moreover, for open source, because there is no overriding commercial entity to pay for access to, and licensing of the HDCP encryption technology it is very difficult. The DRM world is simply not interested in dealing with the open source world.
At the moment, the only support is for LMCE (0710 onwards) to rip the disk to the harddrive, then use a decryption library (illegal in most places!) to pass the content through by stripping the encryption off.
And to niz's point, clearly commercial graphics hardware companies releasing proper open source (or even proprietary) video drivers that allow access to hardware H264 decryption would solve many of Rodercot's issues! In fact they have absolutely NO legitimate commercial excuse for not releasing at least proprietary drivers! There is no more risk to them than any other platform, and we have damn well paid for their hardware, we should be allowed to make use of it!